The renminbi has been boosted by expectations that Joe Biden’s administration could prove less unpredictable than its predecessor in dealings with Beijing © FT montage/Getty/Bloomberg

After years in Donald Trump’s crosshairs, China’s currency is greeting Joe Biden on radically different terms.

The renminbi, currently at a 30-month high against the dollar, has been boosted by expectations that a Democratic administration could prove less volatile in its dealings with China as well as by the country’s strong economic recovery from the Covid-19 pandemic.

But investors are divided over whether the wind will remain in the renminbi’s sails in 2021, with much depending on the trajectory of US-China relations and Beijing’s policy priorities.

Economists’ predictions for the Chinese currency this year range widely, from a 7.2 per cent drop to a 6.6 per cent climb against the dollar. The median forecast, according to analysts polled by Bloomberg, pegs a 2 per cent rise to Rmb6.4 per dollar.

Here are the factors that will determine China’s exchange rate this year.

Will Biden seek to mend ties with China?

China’s currency notched its best six months on record in the second half of 2020 as investors bet that Mr Biden would unseat Mr Trump, whose tariffs on Chinese goods hit the renminbi.

“The Biden administration is likely to be a lot more balanced in its approach” to China, said Mansoor Mohi-uddin, chief economist at Bank of Singapore.

But further strength in the renminbi would require more positive developments in US-China relations, he added, such as the removal of tariffs imposed by the Trump administration, which at one point designated Beijing a currency manipulator.

Line chart of Renminbi per dollar showing China's currency ends Trump's term stronger than it started

Analysts are sceptical of a total tariff rollback, while Mr Trump packed his final days in office with a flurry of measures targeting Chinese companies.

Janet Yellen, Mr Biden’s nominee for Treasury secretary, told the Senate during her confirmation hearing this week that the new administration would “take on China’s abusive, unfair and illegal practices” and was prepared to use the “full array of tools” to redress them.

“Is Biden going to reverse those imminently? Or will he fear that reversing those will create an impression that he has a softer stance towards China?” asked Michelle Lam, Greater China economist at Société Générale, of US sanctions. “It’s still too early to say anything for sure.”

Will a falling dollar spur demand for Chinese assets?

A big determinant in whether the renminbi will strengthen further is the trajectory of the dollar, analysts say, and how it affects global demand for Chinese assets.

With the Democrats taking control of the Senate, Mr Biden will have a better chance of launching almost $2tn in fiscal stimulus, which could accelerate inflation and weigh on the dollar.

“To a large extent the strength in the renminbi you’re seeing now is a reflection of dollar weakness . . . now the question is whether we’re going to see that weakness extend further,” said SocGen’s Ms Lam.

A weaker dollar, combined with expectations that the Federal Reserve will keep interest rates at ultra-low levels, makes it relatively more attractive for investors to hold assets denominated in renminbi.

Line chart of Yields on 10-year government bonds (%) showing Chinese bonds' yield advantage drives renminbi demand

Goldman Sachs analyst Danny Suwanapruti has forecast global inflows into China’s renminbi-denominated onshore debt market will reach $140bn in 2021, up from about $130bn last year.

Monthly inflows into onshore debt will average $5-10bn this year, he suggested. The pace could accelerate to $10-15bn from October, when Chinese government bonds will be incorporated into FTSE Russell’s influential World Government Bond index.

That will help buoy strong foreign demand for renminbi, he believes. Goldman Sachs thinks the Chinese currency will strengthen to Rmb6.2 per dollar by year end.

“Chinese fixed income markets will dominate [flows into emerging markets] in 2021, as they did in 2020,” said Mr Suwanapruti.

More broadly, China's net foreign exchange inflows jumped to about $93bn in December, the largest monthly surge on record according to a Goldman Sachs estimate based on data from the State Administration of Foreign Exchange reaching back to 2010.

What are Beijing’s policy priorities?

China was more restrained than the US in its fiscal response to the coronavirus pandemic. Rapid and severe lockdowns helped bring the virus under control and made China the only big economy to avoid a recession in 2020.

That means China could now focus on reining in financial risks, which were brought to the fore by a string of high-profile defaults in late 2020, even if the scrutiny weighed on growth.

“The priority of policymakers is to contain leverage and focus on the sustainability of debt, given that the economy has pretty much already normalised,” said Ms Lam of SocGen.

While that does not necessarily mean that China’s central bank will push interest rates higher this year, analysts think they are likely to remain well above their ultra-low counterparts in the US and Europe, supporting renminbi strength.

Line chart of Renminbi per dollar showing China’s currency faces uncertain trajectory in 2021

There also remains the question of Beijing’s level of comfort with a stronger renminbi, whose value is in part guided by policymakers.

While China has largely stepped back from active management of the currency in recent years, it still sets a daily fix versus the dollar, against which it can strengthen or weaken up to 2 per cent.

However, analysts believe the People’s Bank of China will maintain a hands-off approach to managing the currency, with any pressure on exporters because of its strength unlikely to prompt intervention.

Becky Liu, head of China macro strategy at Standard Chartered, said an economic rebound in developed market economies as Covid-19 vaccines are distributed would mean “demand for Chinese goods could even stay strong for longer than expected”.

The country’s monthly trade surplus hit its highest ever level in December on huge global demand for medical products. Renminbi “appreciation has not reached an end”, added Ms Liu, who thinks the currency will rise to Rmb6.3 per dollar by the close of the first half.

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